Judge policies by their results, not intentions

New rules on bonus buy-outs could have unintended consequences (Source: Getty)

Sometimes three small words can be very powerful. “Reward for failure” is one such example, a phrase that has come to encapsulate public discontent with the financial crisis and high pay at banks and in business more broadly.

The rights and wrongs of high pay can be argued all day (and all night), but no one of any economic or political viewpoint will endorse reward for failure – which is one reason why politicians are so fond of borrowing the term for their soundbites.

It is also why the Bank of England’s proposed “tougher rules on bonus buy-outs” were largely welcomed yesterday. Say a banker moves from one employee to another, and his or her new employer offers compensation for a bonus that will be cancelled due to the job move; under the new rules, the employers would have to sign a contract whereby the compensation could be clawed back later on if the previous employer says that they have subsequently discovered misconduct or “risk management failings”.

Fair enough eh? Even the British Bankers’ Association welcomed the proposal. “Bonus buyouts should not be used as a way to get around the new remuneration regime and efforts to improve individual accountability across the industry,” it said.

While the sentiment behind the changes may be shared by all, Threadneedle Street’s regulators must ask whether such an arrangement would work in practice.

It would, for example, create a bizarre situation whereby a worker challenges his or her current employer over an investigation undertaken, and a verdict arrived at, by a former employer. Or, in many situations, the worker will have moved on again – and thus be facing a clawback from a previous employer, based on a claim by a different previous employer.

The companies in such situations could, of course, have very different incentives, and very different perspectives on the matter. A decision arrived at by Company A would directly influence the relationship between Company B and one of its employees. As one employment lawyer said yesterday: “Whether this blurring of the lines is desirable or practical is questionable.”

It is tricky to ask such questions in a political environment that is still so hostile to both high pay and bankers’ conduct – but the Bank of England must do just that, and heed the words of economist Milton Friedman who in 1975 identified that “one of the great mistakes is to judge policies by their intentions rather than their results". Forty years later, his warning’s as pertinent as ever.